The 30-share index, which had gained 420.84 points in previous two trading sessions, fell by 101.33 points, or 0.48 per cent to 21,032.88. TCS, ICICI Bank and Tata Motors led the 22 Sensex losers lower. Infosys, HDFC and Cipla led 8 gainers.
The 50-share National Stock Exchange index Nifty declined by 30.90 points, or 0.49 per cent, to end at 6,241.85.
Brokers said besides profit-booking after recent gains, a weak trend in the Asian region and a lower opening in Europe following overnight losses in the US market, too triggered selling activity.
Meanwhile, retail inflation slowed to three-month low of 9.87 per cent in December, supporting hopes the RBI will keep interest rates stable in its policy meet later this month.
Overall market breadth was weak with 1,464 stocks declining compared to 1,226 that advanced on the BSE.
Stocks of Ranbaxy Laboratories remained under selling pressure and fell by nearly 2 peer cent after the USFDA raised concerns about manufacturing practices at the pharmaceutical firm's Toansa plant in Punjab. In the previous session, the stock plunged over 5 per cent.
Among software exporters, Tata Consultancy Services fell 1.78 per cent, HCL Technologies by 1.65 per cent and Wipro shed 1.56 per cent. However, Infosys continued its rising streak to close 0.63 per cent higher.
The IT sector index, which had been leading the rise in the last few sessions, ended in negative territory with a decline of 0.67 per cent.
Sectorally, the BSE Metal index suffered the most by falling 1.41 per cent, followed by Realty index that dipped 1.40 per cent and Banking index slid 0.66 per cent.
Sensex falls over 101 points on profit-booking, global cues
(Reuters) Indian shares fell on Tuesday led by declines in software exporters such as Tata Consultancy Services (TCS) on profit-taking after the recent run-up on better-than-expected quarterly results by peer Infosys Ltd.
Falls also tracked weak global shares as a batch of weak earnings pre-announcements in the United States sparked concerns that the upcoming reporting season may disappoint, leaving some indexes looking expensive after a bumper 2013.
After India's retail inflation in December eased to a three-month low on Monday, traders are eyeing December wholesale price inflation, seen at 7 percent and due Wednesday, and considered to be key ahead of the central bank's rate review on Jan. 28.
Retail prices rose an annual 9.87 percent last month, slower than expected, as vegetable prices fell, giving some relief to policymakers struggling to contain price pressures as growth hovers at a decade low.
Also, a surprise contraction in industrial production and a slowdown in merchandise exports growth, which have dampened hopes of a rebound in Asia's third-largest economy, further reduces the chances of a rate hike, dealers said.
"Growth for India has bottomed out and even valuations look reasonable. Inflation has eased and I think a delay in rate action by the RBI governor signifies he may side with growth," said Nandkumar Surti, managing director and chief executive officer at JP Morgan Asset Management.
The benchmark BSE index fell 0.48 percent, or 101.33 points, to end at 21,032.88, after rising over 2 percent over the last two consecutive sessions.
The broader NSE index lost 0.49 percent, or 30.90 points, to end at 6,241.85.
Software companies fell on profit-taking after the recent run-up on Infosys' better-than-expected quarterly results.
Infosys, however, closed 0.6 percent higher.
CMC Ltd fell 10.5 percent after its October-December profit rose 15.53 percent to 705.4 million rupees, falling short of some analysts expectations.
Ranbaxy Laboratories Ltd fell 2 percent, adding to Monday's 5.4 percent slump, after the U.S. Food and Drug Administration raised concerns about manufacturing practices at one of its factories.
India's retail stocks fell after the newly-elected provincial government in India's national capital on Monday barred foreign supermarkets from setting up shop, a blow to Prime Minister Manmohan Singh's efforts to attract overseas investment and revive the economy.
Trent Ltd fell 2.7 percent while Shopper's Stop Ltd ended 1.7 percent lower.
However, among other stocks that gained, Yes Bank Ltd rose 2.3 percent a day ahead of its October-December results.
The bank may beat consensus profit forecast when it reports results, Thomson Reuters StarMine's SmartEstimates showed.
Cairn India Ltd Ltd rose 2 percent after mining conglomerate Vedanta Resources Plc said it received 99.89 percentage of votes in favour of a proposed share buyback worth up to 57.25 billion rupees ($924 million) by its Indian oil and gas unit.
FACTORS TO WATCH
* Dollar steadies after two-day fall, Nowotny helps euro
* Brent holds above $106 but brighter supply outlook drags
* Shares sell off on U.S. earnings worry
* Foreign institutional investor flows
* BSE index falls 0.48 pct; NSE ends 0.49 pct lower
* Ranbaxy falls on USFDA concerns; brokers downgrade
* Yes Bank profit may beat estimates-StarMine